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07/29/2007

Comment on Benefit Cost Analysis Applied to the Iraq War-Becker

Costs are usually easier to measure in modern wars than benefits. Two estimates of the past and expected future cost of the Iraq war to the United States by Davis, Murphy, and Topel, and by Bilmes and Stiglitz are discussed in my blog entry for March 19, 2006. They quantity the cost of materials and equipment used and destroyed during the war, the higher cost of attracting volunteers to the American armed forces, the cost of the many injuries to military personnel, and the cost of reconstruction aid to Iraq. They also use modern economic research on the amounts necessary to compensate individuals for taking life-threatening risks to value the cost of the number of American lives lost in the war.
The cost estimated by these two studies differs to some extent, as analyzed in my post referred to above. However, a total cost of the war to Americans in the range of $700 billion- $1.2 trillion overlaps both studies. For the purposes of my discussion, I assume the total American cost of the war will amount to $1 trillion. As Posner well discusses, some potential costs are extremely difficult to quantify, and hence they are ignored by both these studies. Such hard to quantify costs include any increased alienation of Muslims toward the United States, the experience gained by the insurgents in fighting American military power, and a potential widespread conflict between Sunnis and Shiites.
Benefits of the war are even hardier to quantify than the costs. Possible benefits would include increased skill of the American armed forces at fighting insurgencies in cities that use suicide bombers, car bombs, and other modern tactics, preventing Saddam Hussein from using the international weapons black market to acquire weapons of mass destruction, perhaps a weakening of terrorist organizations like Al-Qadda, the stabilization of the Middle East, and possibly other benefits. Since difficulties in quantifying such benefits apply to other modern wars and also to many other large-scale activities, it might seem that benefit-cost analysis is useless when applied to these kinds of issues.
Obviously it would be much easier to assess wars and other big events if benefits also could be readily quantified; maybe that will become possible some day as economists continue to make progress in finding ways to quantify various intangible benefits and costs. I say, "continue" because not that long ago economist believed that the value of life to individuals was unquantifiable. Yet advances in the theory of risk-bearing showed how the statistical value of a life could be estimated from choices individuals make in situations that increase their probability of dying, such as driving fast, or working as civilians in war zones such as Baghdad.
Still, even without direct estimates of benefits, the costs estimated for the Iraq war can be used to make a benefit-cost assessment of the war. Given a cost of the Iraq war of say $1 trillion, how big would benefits from the war have to be to exceed this amount, and is that likely? For example, $1 trillion is equivalent to a payment of a little over $10,000 by every single American family, or about twenty per cent of average family income. Would the typical family be willing to pay that much to finance the war in Iraq because they believe that they will get at least that much in benefits from the war? Almost surely the answer would be an overwhelming "no" in any poll taken about Americans' willingness to pay this amount for the war, although some people might not appreciate some long term benefits (or costs), like a possible regional stabilization or serious harm to a terrorist organization.
The estimated cost of the war can be translated into other measures that may help in determining whether or not the war is considered a success or failure. For example, if the statistical value of life is taken to be $5 million for the average young American- this magnitude is in the center of various estimates of such a value- then a $1 trillion cost of the war is equivalent to a loss of 200,000 young men and women. Since this is far greater than the actual loss of lives even in most major wars, like the Vietnam war, it is hard to believe that Americans would be willing to pay that much for the Iraq war, even if Hussein had or was likely to acquire weapons of mass destruction. To be sure, a complete translation of the total cost into a lives-lost equivalent is extreme and possibly misleading, but it does provide a way of gauging the benefits necessary to justify the huge cost of the Iraqi war.

Excuse me. At my lemonade stand I used to give the first glass away free and charge five dollars for the second glass. The refill contained the antidote.
I am from Liechtenstein and now study English, give true I wrote the following sentence: "Below is a selection of new bathroom vanity mirror for sale."